Raghuram Rajan Effect: Rupee Up at 65.54, Sensex Soars 550 Points

The rupee rallied and shares surged on Thursday after the Reserve Bank of India (RBI) chief unveiled a slew of measures

The rupee rallied and shares surged on Thursday after the Reserve Bank of India (RBI) chief unveiled a slew of measures to support the ailing currency and open markets, providing a shot of confidence for investors unnerved by the country's worst economic crisis in two decades.

The rupee rose as much as 2.3 percent to 65.53 per dollar, well off the record low 68.85 hit on August 28.

The Nifty rose as much as 3.3 percent, propelled by lenders such as HDFC Bank, which surged after the new measures included increasing overseas borrowing limits for banks.

However, amid the euphoria over RBI Governor Raghuram Rajan's strong Wednesday debut, economists warned he cannot by himself solve the challenges in an economy facing a sharp growth slowdown and a record high current account deficit, which have fueled a 16 percent slide in the rupee so far this year.

The government has failed to push through politically tough reforms needed to fix the economy, and elections due by next May instead raise the prospect of expensive populist spending that could threaten the country's sovereign credit rating, which is one notch above junk status.

At least for Thursday, Indian markets reflected the optimism placed on Rajan, a former chief economist at the International Monetary Fund who unexpectedly unveiled a flurry of proposals in his first day at the helm of the central bank.

In terms of action to prop up the rupee, the measures included providing exporters and importers more flexibility in hedging their forward currency contracts, as trading firms had long complained about regulations that left them unable to quickly cope with rapid currency movements.

India's defence of the rupee has so far relied on controversial steps taken by the RBI, which have included draining cash from the market, raising short-term interest rates and imposing capital controls on resident Indians.

Investors have expressed little faith that the government can push through substantial reforms, such as a hike in subsidised fuel prices, that could help revive confidence in the economy.

Asia's third-largest economy is suffering from a dearth of investment and sharp slowdowns in the manufacturing and services sectors.